Page 30 - Book3E

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Assessing your ratio a couple of times a year would be wise to help you avoid potential problems that arise from job loss, illness, or divorce. If you find your ratio has increased, make changes to your spending habits to get things back in line.
If your debt-to-income ratio is 20% or less, you are able to meet your monthly payments and pay more than the minimum on your credit card balances, have money in a starter emergency fund, and make deposits in a retirement account. Congratulations! You are doing better than many people.
How to Calculate Your Debt-to-income Ratio
1. Total all your monthly gross income. This is the total you calcu- lated in Volume 2 on page 12.
2. Total all your monthly debt payments, excluding your mortgage or rent. Make sure you include credit cards, student loans, medical bills, and auto loans. NOTE: Debt on these is only your monthly payment. For example, if you have a credit card balance of $1500 and the minimum monthly payment is $49, the $49 is what you add to find your monthly debt.
3. Divide your total monthly debt by your total monthly gross income. For example:
Total Monthly Gross Income Total Monthly Debt 600/3000
0.20 x 100
The debt-to-income ratio is 20%.
= $3,000 = $600
= 0.20
= 20%
If the person in this example had monthly debt payments totalling $900 or more, a ratio of 30%, he or she would have difficulty making the monthly payments. Why? Because monthly debt payments do not include utilities, transportation, food, clothing, or any other
Taking Your Finances Beyond Your Home